Patrick v. Alacer Corp. (2011) , Cal.App.4th

FACTS
Alacer and the Trust:
Jay founded Alacer in 1972. He met plaintiff in 1975. They married in 1988. Jay transferred all Alacer shares to a revocable trust in 2000. The trustees were Jay, plaintiff, defendants James Turner, Thaddeus Smith, Ronald Patrick, and another person who later resigned.

Jay amended the trust's "Distribution upon Death" provision in January 2001. The amendment provided: "(1) Because of the pending dissolution of marriage from my wife, Ymelda, her claims of a community property interest in my Alacer stock, and my desire that she not obtain or have control of a majority of the shareholder interest of Alacer, because of her inability to properly run the business, I direct that upon my death, if I am still married to Ymelda and she has at the time of my death a community property interest in the stock of Alacer, that the trustees distribute not more than 46% of the shares now held in my name to Ymelda, as her community share of my entire estate and that the balance of any community property interest that she may have in the Alacer stock or the community property owned by us be distributed to her from my estate as probated by the court and that it not be Alacer stock. It is my intention that of my entire estate she receives nothing of my separate property and only receive hercommunity share of our community property, if any. Jay died in February 2003. Thereafter, the trustees elected themselves to Alacer's board of directors.

The Alacer and Turner Decisions:
Plaintiff filed the initial complaint in this action in December 2003. In a third amended complaint, plaintiff asserted direct and shareholder derivative claims against Alacer, Smith, Turner, and Patrick. Plaintiff alleged she and Jay built Alacer together, both before and during their marriage, and that she had a community property interest in the Alacer stock. At the outset, we held Alacer could not demur to shareholder derivative claims plaintiff brought on its behalf, except on limited grounds related to standing. Yet plaintiff alleged standing to assert the derivative claims, we held -- "assuming as we must the truth of the allegations," and giving the "'derivative suit standing requirements a liberal construction.” We noted plaintiff "alleged she and [Jay] both devoted substantial time and effort during their marriage to creating Alacer's vitamin supplements and developing its business." If true, we held "plaintiff may have acquired a community property interest in [Alacer] through their alleged joint devotion of time and effort to it during their marriage. Plaintiff alleges the increase in value of the Alacer stock, in excess of that attributed to a fair return on her husband's original investment, is community property. And the Trust directs the trustees to satisfy this community property interest by transferring Alacer stock to plaintiff. While the Trust may be the only record shareholder, plaintiff's alleged community property interest in Alacer, if true, essentially makes her an unregistered Alacer shareholder."

Finally, we held the court wrongly entered judgment against plaintiff on her declaratory relief cause of action, in which she "sought a declaration that has a community property interest in Alacer shares." Plaintiff was allowed to add that cause of action for the first time in the third amended complaint because it "directly responded to the court's reason for sustaining [an] earlier demurrer" -- plaintiff's lack of "standing as a beneficial shareholder of Alacer." The court correctly sustained the demurrer because plaintiff failed "to join indispensible parties, namely, Alice Patrick Nigl and [Jay's] lineal issue." But it should have granted plaintiff leave to amend to add these parties.

Remand, Trial, and the Underlying Judgment:
After adding the indispensible parties as defendants in a fourth amended complaint, plaintiff filed the operative fifth amended complaint. She asserted direct causes of action for impairment of community property, constructive trust, breach of fiduciary duty, and injunctive relief, as well as shareholder derivative causes of action for breach of fiduciary duty and injunctive relief. Plaintiff also reasserted a declaratory relief cause of action. She sought a declaration of her "community property and stock ownership interest in Alacer." The court bifurcated this cause of action, staying discovery on the others.

After a bench trial on the bifurcated declaratory relief cause of action, the court (Judge Tucker) issued its 17-page final statement of decision in July 2010. It made nine notable express findings.

First, plaintiff's cause of action was timely. The court found "the declaratory relief cause of action essentially arises out of Family Code § 1101 [subdivision] (b)," which authorizes it to "'determine the rights of ownership in . . . community property, and the classification of all property of the parties to a marriage.'" Analyzing Family Code, section 1101, fn. 2 the court concluded: "by stating that, upon death, an action may be brought 'without regard' to the three-year limitation, the language indicates that no limitations period applies." Because no limitation period governed plaintiff's claim, the only time restriction would be laches, which defendants failed to establish.

Second, Alacer was Jay's separate property. The evidence showed Jay founded Alacer and was its sole shareholder before he married plaintiff. No evidence showed any transmutation. Nor did Alacer somehow lose its separate property status by being "commingled" with community property.

Third, some portion of Alacer's increased value must be equitably apportioned to the community. Alacer indisputably increased in value during the marriage, and Jay "put much more than minimal efforts into the business." His efforts during the marriage were community efforts.

Fourth, Alacer's value would be apportioned using the method in Pereira v. Pereira (1909) 156 Cal. 1 (Pereira). Courts use this approach when "'business profits are principally attributed to efforts of the community.'" On the other hand, when "'the business profits accrued are attributed to the character of the separate asset,'" courts use the method in Van Camp v. Van Camp (1921) 53 Cal.App. 17 (Van Camp).

Here, "Alacer's growth was the result of a combination of Jay Patrick's efforts and the intrinsic value of the separate property business . . . ." Given this, "substantial justice is best accomplished by use of the Pereira formula, paying careful attention to the valuation methodology and the capitalization rate used in the methodology." Accordingly, the court would apply Pereira and "calculate[] a fair return on [Jay's] separate property investment in the business," with "the remainder belong[ing] to the community."

Fifth, the fair return on Jay's separate property investment in Alacer was about $530,000. The parties' experts used slightly different methods to determine the Alacer's value at the October 1988 date of marriage, but defendant's expert agreed it would be appropriate to use the average of their values – just over $250,000. The experts agreed a fair rate of return would be 7.68 percent per annum through Jay's death in February 2003. Applying that return to Alacer's value at marriage resulted in a separate property interest of just over $530,000.

Sixth, Jay's February 2003 date of death would be used to value the remaining community property interest in the Alacer stock. While community property is generally valued at the date of trial, Alacer was Jay's separate property. The only community property here was "the skill, effort and talent of Jay Patrick that was expended during the marriage. Hence, the court must value that skill, effort and ability from the time the marriage began until Jay died. To state the obvious, when Jay passed away, he no longer contributed any community skill, effort, or talents to increase the value of Alacer."

Seventh, Alacer's value at Jay's death was just under $7 million. The court adopted defendant's expert's use of the "capitalization of excess earning" methodology, which the expert described "as the primary or most widely used' valuation methodology . . . ." It rejected that expert's attempt to average the result of that methodology with the significantly lower result of "capitalized cash flow method," as he "offered no explanation as to why an average would be appropriate in this case." And the court rejected plaintiff's expert's reliance on a 2006 bank valuation that led to results that "fluctuated wildly" -- $19 million (low end), $73 million (high end), $46 million (initial average), $30 million ("corrected" average). Besides, plaintiff's expert has also used the "capitalization of excess earning" methodology to value Alacer at the date of marriage. Adding "the value of Alacer business assets using the excess earnings method" and "the value of non-income producing assets" yielded a total value of just under $7 million. Deducting about $530,000 for Jay's return on his separate property investment left a community interest of just under $6.5 million. Plaintiff's 50 percent share of the community was just over $3.2 million.

Eighth, plaintiff was entitled to prejudgment interest starting at Jay's death. Her "community property interest existed as of the date of Jay's death" in February 2003, and she had "lost the use of her share of the community property" ever since.

Finally, plaintiff was not entitled to receive Alacer shares to satisfy her community property interest. To be sure, Alacer held plaintiff had alleged "standing as a beneficial shareholder to bring her derivative causes of action." And "[i]t is clear that, if Alacer were a community property business, plaintiff would have a present, existing, and equal community property interest as a stockholder in Alacer."But Alacer appropriately did not reach the merits to determine whether Alacer was a community property business. That was the trial court's duty and, after the bench trial on the declaratory relief cause of action, the court found the Alacer stock was Jay's separate property. "Plaintiff's community interest prior to Jay's death was in one half of the profits arising from the skill, efforts and industry he applied during the marriage to increase the value of his separate property business. His death does not transform Alacer into a community property business or transform plaintiff's right into one for stock ownership."

With the declaratory relief cause of action resolved, the court (Judge Gastelum) granted judgment on the pleadings to defendants on the remaining causes of action. It found "each of the [causes of actions] is based on Plaintiff's assertion she has a shareholder interest or is entitled to the stock of Alacer. These issues were determined adverse to Plaintiff in Phase I." The court denied plaintiff's motion for leave to amend the complaint. It entered judgment accordingly in December 2010.

DISPOSITION
The judgment is affirmed. In the interests of justice, the parties shall bear their own costs on appeal. Rylaarsdam, Acting P.J., and O'Leary, J., concurred.